First, it is always better to acquire your new property in the same entity as which you sold your old property. This is because you are maintaining the same taxpayer throughout the exchange. However, for several reasons, Exchangers can find that they need to transition their ownership interest into a new entity or structure for their Replacement Property.
In many cases transitioning into a different entity is not a problem, provided the entity essentially remains as the same taxpayer or as a disregarded entity for the purposes of paying tax. Below are a few examples of transitioning into a different entity which will not jeopardize an exchange.
However, there are cases where the problems arising from a change in structure are significant because modifications are made to the actual taxpaying entity. Let’s look at a few problematic instances:
To avoid disqualifying the exchange, the Exchanger should not make any changes in the vesting of the Relinquished or Replacement Properties prior to or during the exchange. And, Exchangers are cautioned to consult with their tax or legal advisors regarding how their vesting issues will impact the structure of their exchange before they transfer the Relinquished Property. Remember, proper planning and negotiation can make the difference between a successful exchange and a taxable problem.DISCLAIMER: To ensure compliance with requirements imposed by the IRS, we inform you that the information posted at this website does not contain anything that is intended as legal or tax advice, and that nothing herein can be relied upon as legal or tax advice. Further, the IRS wants us to let you know that nothing herein can be used for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any tax-related matter addressed herein. If assisting with your Section 1031 tax-deferred exchange, Fyntex cannot advise the owner concerning specific tax consequences or the advisability of a tax-deferred exchange for tax purposes. We recommend that anyone contemplating an exchange seek the advice of an accountant and/or attorney.